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The wave of hospital merger and acquisition activity over the past several years has continued through 2015 due to pressure on traditional hospital reimbursement, as well as concerns over navigating a post-Affordable Care Act (ACA) health care landscape focused on "value over volume" reimbursement, increased provider collaboration, quality incentives and population health management. With the increase in hospital mergers and acquisitions, hospitals are operating in a transactional environment that is being heavily scrutinized by regulatory authorities for antitrust concerns and potential fraud and abuse violations.

Recent Trends

Since the passage of the ACA, hospital transactional activity has increased significantly. According to a preliminary analysis by Irving Levin Associates of publicly reported deals, second quarter transactions for 2015 included 23 hospitals deals, equaling the 23 transactions announced for the first quarter of 2015. Additionally, second quarter spending reached $2.0 billion (up from $693 million during the first quarter), largely as a result of the acquisition of Ardent Health Services by Ventas, Inc. for $1.75 billion. Levin reports that 2015 activity is tracking consistently with 2014 activity, when 103 mergers and acquisitions among hospitals and health systems were completed. Each year for the past five years, at least 90 hospital and health system transactions have been announced.

In addition to the number of transactions, the reported monetary size of the transactions and the number of enterprises involved has also increased significantly. The Ardent Health Services acquisition is merely one example. Other examples include the merger between Community Health Systems and Health Management Associates in 2014, a deal involving more than 200 hospitals and valued at $3.9 billion, as well as the combination of Tenet Healthcare and Vanguard Health System in 2013, a deal involving more than 75 hospitals and valued at $4.3 billion.

Merger and acquisition activity appears to be particularly prevalent among non-profit rural, independent, and community hospitals, which sustain continued pressure to position themselves for a value-based reimbursement environment based on the delivery of accountable care and population health management. Alternatives to outright acquisition of rural and community hospitals that desire to remain independent include partnerships or "cooperative" arrangements with other tertiary care hospitals for high cost specialty-intensive services such as cardiology, oncology, neurology and trauma.

Additionally, health system enterprises continue to consider new organizational arrangements for reasons that include (1) the achievement of certain cost efficiencies and economies of scale, including supply chain and revenue cycle management; (2) the expansion of their physician network and increase in clinical integration, resulting in an enhanced patient care continuum and the sharing of common clinical protocols across locations; and (3) the ability to manage the health (and associated risk-based payment) of a defined population through the utilization of patient population data analytics across organizations. These key driving factors, now serving as a catalyst for the recent wave of acquisitions and affiliations, are not likely to fade in the foreseeable future.

Regulatory Scrutiny and Legal Considerations

Antitrust issues remain a significant legal consideration for hospitals considering a merger or acquisition. With the increase in hospital transactional activity, the Federal Trade Commission (FTC) has taken a more aggressive approach over the past few years regarding its review of hospital mergers and other hospital-physician transactions. While some have criticized the FTC's approach as undermining the ACA's goals of fostering collaboration and integration among providers in an effort to improve patient quality of care and contain escalating health care costs, it is not likely the goals of the ACA will trump antitrust enforcement.

As recently as February 2015, the FTC and Department of Justice (DOJ) held a public workshop to discuss recent developments related to health care provider organizations and payment models, including accountable care organizations, non-traditional fee-for-service reimbursement models, provider consolidation and network trends, among others. Significantly, the FTC emphasized that "[t]he goals of health care reform are consistent with, but do not supplant, the goals of competition law and policy. The FTC recognizes that more coordinated and integrated care can help transform health care delivery and payment toward a risk-based financially and clinically integrated system that will improve and reward patient outcomes. But we determined, and the courts agreed, that these goals could be achieved by aligning incentives in other ways, rather than allowing an acquisition that would substantially lessen competition and create a risk of significantly higher prices."

Along with antitrust scrutiny, transactions involving hospitals face fraud and abuse concerns related to Stark and Anti-Kickback laws. In addition to the increasingly common prosecution of Stark Law violations through the False Claims Act qui tam ("whistleblower") actions, there has also been a rise in Stark Law settlements through the Self-Referral Disclosure Protocol program created by the Centers for Medicare and Medicaid Services following passage of the ACA. There is a clear message from the DOJ that it is taking an aggressive stance on health care fraud and is using all of the tools available to them to combat it. In 2014, the fifth straight year where recoveries exceeded $2 billion, the federal government recovered nearly $5.7 billion in health care fraud cases, up almost $2 billion from 2013. Recoveries for 2015 are on track to do the same.

Given the increase in federal regulatory enforcement actions and the intricate requirements of the Stark Law and Anti-Kickback Statute, compliance concerns related to actual or potential Stark and Anti-Kickback violations are becoming increasingly common during the due diligence phase of a hospital or health system transaction. Careful attention to these issues prior to finalizing these transactions can avoid a host of issues down the road. The DOJ is not showing any leniency in these cases, despite their complexity.

The increase in government regulatory scrutiny involving hospital transactions is also due, in part, to the myriad of hospital-provider affiliations that are being developed in addition to the traditional merger and acquisition deal structures. Hospitals are increasingly seeking to align with other providers in legally complex structures, such as joint ventures, accountable care organizations and clinically integrated networks, each with its own unique structure and associated regulatory compliance risks.

Future Outlook

The outlook for transactions involving hospitals for the remainder of 2015 and over the next few years appears to be strong as a result of the multiple forces driving these transactions. The growing trend for financially strong hospitals and health systems to blur the lines of traditional organizational types is likely to continue as these organizations pursue integration through joint ventures, partnerships, and affiliations with rural/community hospitals, academic medical centers, accountable care organizations and commercial health plans as well as through clinically-integrated networks and joint network alliances.

Practice Tip

Given the trend for increasingly complex methods of integration and the heightened regulatory scrutiny surrounding hospital transactions, it is critical for providers to work with legal counsel early in the due diligence phase to successfully comply with both antitrust and fraud and abuse laws affecting transaction structures when embarking upon acquisition and affiliation activities in the highly competitive post-ACA health care arena.

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